LOS ANGELES -- Millions of dollars in California local sales taxes -- and potential bond issues as well -- hang in the balance as public officials throughout the state anxiously await a crucial state supreme court ruling.
Earlier this month, the California Supreme Court heard arguments on the validity of a half-cent sales tax to fund jails and courts in San Diego Couty. The county has collected more than $320 million that it cannot spend until the court makes a decision in Richard J. Rider v. County of San Diego, according to Bruce MacLeish, deputy county counsel of San Diego County.
"The decision could go either way," Mr. MacLeish said, adding that he hopes for a ruling soon, perhaps early nexy month.
The state's high court will either uphold or overturn an appellate court decision last year that said the tax is valid. The California Fourth Appellate District Court of Appeals said that a lower court erred in 1989 by deciding that the San Diego sales tax increase required a two-thirds voter approval, rather than the simple majority support it received in a June 1988 election.
Municipal market participants have followed the case closely because other California counties might seek similar sales tax increases to fund jail and court improvements if the tax is upheld. Those tax increases could generate billions of dollars of new revenue across the state in the next decade, and in some instances, that revenue stream will secure bond sales.
Critics of the sales tax increae in San Diego County filed suit because they claimed the San Diego Regional Justice Facility Financing Agency was set up as a ploy to bypass Propostion 13, the 1978 property-tax cutting measure. Under Proposition 13, alocal "special" tax must be approved by a two-thirds vote.
Lawyers said the high court could fashion a decision in at least three ways. The court could rule that a particular factor applied only in the case of San Diego County's sales tax to make it invalid and therefore may not effect similar cases. The court also could find that local governments need a two-thirds voter approval for all such similar taxes. Finally, the court could uphold the validity of such taxes by majority vote.
The appellate court found that the "provisions of Proposition 13 have no application to the matter at hand" in San Diego County. The appellate court relied partly on a 1982 state Supreme Court ruling, which established that the Los Angeles County Transportation Commission could impose a sales tax increase with simple majority approval. The 1982 court decision held that the commission did not have the power to levy property taxes and, therefore, was not subject to the two-thirds special tax provisions under Proposition 13.
If the state high court rules that a two-thirds vote is necessary, the decision may affect litigation pending against other sales tax increases throughout the state. Other lawsuits include a challenge to a sales tax increase for transportation in Orange County and opposition to a general sales tax increase for health-care and transit needs in Monterey County.
"If they were to hold that a sales tax is a special tax in all circumstances, that would be very bad for transportation in California," said Richard M. Jones, a partner of the law firm of O'Melveny & Myers. "I think this is one of the most important cases this year."
Lou Solton, treasury of Monterey County, noted that "depending on the outcome, we'll either be in the chips or we won't." The county has collected more than $21 million in sales tax revenues that were expected to fund transportation and health improvements. The tax was passed by voters in November 1989.
Another pending suit aims to block the efforts of at least six counties -- Orange, Los Angeles, Ventura, San Bernardino, Riverside, and humboldt -- to move forward on sales tax increases for justice facilities.
"It may impact us, depending on what they say in Rider," said Tom Agin, deputy county counsel for Orange County. "There are some of the same issues involved," he said.
It is unclear how millions of dollars in sales taxes already collected from taxpayers would be refunded if the court ruled against the tax. Both San Diego County and Monterey County officials speculated that sales tax collection in the counties might be suspended or reduced for a certain amount of time.
"But no one really knows what will happen," said Mr. MacLeish. "It just depends on the basis of their ruling."
Some undertainty also exists as to whether voters will support future sales tax increases, even if the cout upholds a majority vote provision for purposes such as jails and courts. The state already boosted sales taxes this year to help close its budget gap, and voters may resist additional tax increases, especially in a sluggish economic environment.
